Last month saw the publication of an excellent e-pamphlet by Robin Ramsay, editor of Lobstermagazine since 1983 and the author of The Rise of New Labour and Politics and Paranoia. Well, How Did We Get Here? A Brief History of the British Economy, Minus the Wishful Thinking, describes how the British banks and their (sometimes hapless) political allies were able to overcome the constraints imposed on them by the rest of society, devastating British manufacturing in the process and eventually driving the whole country into economic ruin. Tom Mills spoke to the author about how we got here.

It’s well understood that Thatcher’s policies served the interests of the financial sector, but the previous Conservative Prime Minister, Edward Heath, is rarely seen in this way. What was Competition and Credit Control and why do you think it is so overlooked in mainstream accounts?

Competition and Credit Control (C3) was a new system of banking regulation (or non-regulation) introduced by the Conservative Government in 1971. It was presented as technical change by the Bank of England and was not examined by any parliamentary scrutiny. Yet it changed the banking system profoundly. Before C3 the interest rate, the amount the banks could lend and the amount they had to retain as a capital base, were set by central government. Banks wanted rid of all that and C3 removed so-called ‘physical’ controls on lending – lending ceilings – and left the whole thing to the market. Under the new system, if credit expanded too rapidly for the liking of the Bank of England then interest rates would be put up to discourage borrowing until the volume of lending was reduced. As you can imagine, this was a wonderful racket for the banks. It meant they could lend whatever they liked and then charge more for loans because they lent too much. The Prime Minister Edward Heath knew nothing about any of this. Like most British politicians he didn't understand economics and left it to other people. When the C3 changes led to a credit bubble and he found that he was then required to put up interest rates, he refused because a rate rise would have impeded his ‘dash for growth’, which was supposed to revive manufacturing.

None of this is usually mentioned by most politicians, media commentators and economists, who are allergic to political economy. They do not want to recognise that there is a structural conflict between manufacturers and financiers within the British economy even though it has been staring them in the face for nearly a century.

You describe the Labour Party as having been historically, geographically and institutionally the party of the domestic economy. So do you see ‘Old Labour’ as having been a corporatist alliance between manufacturers and unionised workers? I wonder how important you think tensions between capitalists and workers have been to the history of the Labour Party.

Old Labour was indeed essentially part of a kind of producers’ alliance. This was the model learned during the Second World War when the state had to take the unions on board in the pursuit of output.

Many of the British trade union leaders wanted something like the kind of system they have in Germany (whose industrial relations system was set up by a delegation from the TUC after the Second World War). Both Heath and Callaghan were fans of the German system of joint control of industry by managers and unions. There were two problems for the Labour Party in trying to achieve this. One was the fact that the unions funded the party and some of the unions leaders did not wish to be incorporated into the state and used their influence on the party to prevent this. The second was the existence within the Labour Party, and the wider labour movement, of people – socialist, communists – who were totally opposed to this and worked to obstruct it. Wilson tried with his ‘In Place of Strife’ proposals, which were rejected by the Party under the influence of the unions. Then Heath tried and that failed too. It is a measure of Heath’s innocence that he thought that this was something worth pursuing. How could the unions, which funded Heath's opponents, co-operate with him on a new industrial relations structure, even if many of the movement's leaders agreed with it?

Tensions between capitalist (owners) and worker are eternal, but the German corporatist model or the British tripartite system – which was sort of tried under Wilson through things like the National Economic Development Council – minimises them. But it takes big cultural shifts on both sides and it takes time – or national emergency like the Second World War – to put such arrangements into place.

The Bank of England plays an active political role in your account, lobbying for the interests of financial capital. I thought this was interesting since the Bank was by that stage a publicly owned, national institution. How do you see the Bank’s role in the history of the British political economy?

It has been the central lobby for the City. What else could it be? Until Gordon Brown made it independent in 1997 the Bank was in constant political conflict with other sections of Whitehall and the wider society which represented the interests of the domestic manufacturing economy. Harold Wilson’s memoir contains an interesting few pages about his conflict with Lord Cromer when Cromer was Governor of the Bank of England. This conflict was briefly taken on board by Labour in the early 1980s as the Thatcher-Lawson slump deepened and the City boomed. For a few years the conflict became unavoidable and some such sentiments even found their way into the 1989 policy review document via an economic policy review committee chaired by Bryan Gould MP. But after the third election defeat in 1987 the people around Labour leader Neil Kinnock just wanted Labour to get into office and decided to challenge nothing.

Boris Johnson claimed at the Conservative Party conference that it is the historical function of the Conservatives to clear up the mess left by Labour governments. This is obviously nonsense, but more than that you argue that the exact opposite is closer to the truth.

This is total shit – and the same shit that the Republicans try in the USA. The weird thing is that so many Labour people seem to believe it. The perception seems to be based on the fact that Labour was in office in 1975 when inflation reached 25% and that therefore Labour must have caused the inflation. In fact there is a lag of at least a year between inflationary cause and effect and the Great Inflation was created by Heath’s ‘dash for growth’ – the expansion of public sector spending, changes to personal taxation and of course the expansion of bank lending made possible by C3.

There are what we now think of as dominant narratives within society, and in the case of the economy the narrative has been dominated by what used to be called the overseas lobby – the last vestiges of the British Empire centred round the City. That this false narrative got established and sustained was partly the fault of the Labour Party during the 1970s which didn’t challenge it enough (my impression is that no one recognised how important this was); and partly that the media and political commentariat were basically economically ignorant, meaning that when the ‘monetarist’ faction of the Tory Party appeared circa 1975, they didn't know enough to laugh it out of existence. I did a subsidiary course in economics while at university in 1971–74 and we – general social science students – were given the quantity theory of money by our economics tutor to have some fun with. The world has now forgotten how stupid the theory seemed when it was first canvassed by what became the Thatcher faction.

Labour then became afraid to challenge this dominant narrative in the later 1980s with successive Thatcher election victories, not least because, with the exception of Bryan Gould, none of the rest of the Shadow Cabinet had any economic knowledge worth mentioning. And if there's one thing politicians hate it's trying to defend policies they don't understand.

So you don’t think Gordon Brown understood economics either?

This is more complex than it looks. Clearly, as his memoir shows, he understands economics in the sense that he was au fait with the concepts bandied about among international economics ministers – the discourse of globalisation and so on. He was taught all that by American academics on his summer holiday trips to New England while in opposition in the 1980s. But that isn’t really what matters. Did Brown understand the British political economy? Did he really believe that in some fashion a booming City of London would create jobs for his unemployed constituents in Fife? And if so, what was he telling himself? We don’t know. In practice while in office New Labour simply ignored the domestic manufacturing economy, allowing it to decline from about 20% to about 13%. Neither Gordon Brown nor Alistair Darling have explained the thinking behind this, though both have expressed vague regret that it happened.

What prospects do you see for rebuilding a more sustainable and humane political economy and do you see any role for the Labour Party?

The prospects look bleak for UK PLC. All the major parties are now talking about 'rebalancing' the economy away from the financial services, but how do you do this do this in an open international economy? All the successful manufacturing economies created since the Second World War were created behind trade tariffs and controls of capital flows. There is no plan B. For our politicians, if they grasp this – and most of them do not – this will look like an insurmountable problem. It might mean leaving the World Trade Organisation and the EU, not to mention facing down the City. So what we are going to get is little gestures like Vince Cable's ‘business bank’, which will have a few billion to lend but no more powers and nothing of consequence will happen.

We are now paying the price for the politicians' allowing UK capital – finance and manufacturing – to be moved abroad in search of higher returns and lower wage rates. (Thank you Mrs Thatcher for the abolition of exchange controls in 1980.) Until that manufacturing base is recreated here, or repatriated from abroad (which is unlikely) we are just going to slowly decline. Until Labour can force itself to recognise this, it is largely an irrelevance, offering merely a slightly ameliorated version of the dominant narrative.

Tom Mills is a freelance investigative researcher based in London, a PhD candidate at the University of Bath and a co-editor of the New Left Project.